EURUSD saw a boost yesterday as the ECB cut rates, but it did not sound as dovish as some had expected. When asked if they had considered a 50-bps rate cut, the head of the bank said, “I can reassure you right away, we did not even utter the two numbers: five, zero. So, 50 was not in the debate at all”. Also, when asked, Lagarde also did not give any signals that the cycle of lower rate would end.

There are good reasons to cut rates. One is that economy is weak. The GDP growth rate is at 0.9%, while the biggest country, Germany, registering a negative GDP growth of 0.2% in Q4.

The central bank acknowledged that and said the economy “is set to remain weak in the near term.” The HCOB Eurozone Composite Purchasing Managers Index (PMI) supports this claim, rising from 49.6 in December to 50.2 in January.

So why is the ECB not ready to cut by 50 bps? The reason is inflation, below the 2% target months ago but has recovered to 2.4%. Cutting too fast today could potentially increase inflation expectations.

But the path of rates remains unchanged. The ECB will likely keep cutting rates, triggering a lower EURUSD, while the Fed will unlikely cut until June 18, 2025. However, that could easily be delayed given the current state of the US economy and the new government's policies.

In their January 29 statement, the Fed said, “Recent indicators suggest that economic activity has continued to expand at a solid pace,” alongside, “The unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid,” and “Inflation remains somewhat elevated.”

Those comments are not from a bank cutting rates, so they are holding. President Trump was unhappy with the outcome, and in a Truth Social post he blamed the Fed and Powell for creating inflation. His solution to the problem is to “unleash American energy production, slash regulation, rebalance international trade, and reignite American manufacturing, but I will do much more than stopping inflation”. In the same post, he said, “The Fed has done a terrible job on bank regulation. Treasury will lead the effort to cut unnecessary regulation and unleash lending for all American people and businesses.”

If the government follows through with this, it will further boost GDP. Yet with unemployment already at a low of 4.1%, the downside is limited and the risk for inflation will be very high unless the labour force expands.

With both central banks having their path set, EURUSD is likely to trade lower unless the situation materially changes in the coming months.

Technically, the longer-term EURUSD trend remains bearish, below 1.0615, while the short-term trend is upward above 1.0338. If the price trades below 1.0338, EURUSD could drop to its 2025 low of 1.0172 and parity, as both short-term and long-term trends would be aligned.